A captive insurance company that was later dissolved challenged $800,000 in taxes and penalties in the U.S. Tax Court, saying the Internal Revenue Service wrongly claimed the company had $3 million in unreported long-term capital gains.

In a petition Wednesday, Hanover Insurance Co. Ltd. argued that the IRS made a number of errors in calculating its tax liability for 2021, including that it had long-term capital gains that were more than the assets it reported holding for the tax year.

The agency also claimed the company owned an interest in another company valued at more than $2 million, with a basis of zero, but didn't identify the company, Hanover said. The IRS further alleged, also incorrectly, that Hanover's unpaid taxes were due to a substantial valuation overstatement, according to the company.

Hanover was formed under the laws of St. Kitts and Nevis in 2008 and licensed as a captive insurance company for small groups, according to the petition.

For the next 10 years, it sold property and casualty insurance policies to companies owned by its shareholders. It also created multiple wholly owned subsidiary investment companies, each of which was affiliated with a Hanover shareholder, it said. Under the arrangement, the shareholder could "invest any surplus attributable to the insurance premiums that his or her operating company paid to Hanover," the company said.

When the policy period expired, Hanover "would make capital contributions based on the surplus insurance premiums to each of the subsidiary investment companies," the company said.

The subsidiaries then used those surplus payments to buy assets, according to the petition.

Hanover's five shareholders liquidated the company in 2021 and all the leftover assets were transferred to the shareholders. Hanover said it reported those investments were worth more than $1 million. The company did not have any unreported capital gains that year, it claimed, and doesn't owe any taxes.

Additionally, the company said it shouldn't be responsible for the $133,000 in penalties because it took tax positions that were backed by good evidence. Hanover "acted in good faith and with reasonable cause," it said, including relying on tax professionals.

An attorney for Hanover declined to comment.

The IRS declined to comment.

Hanover is represented by Patrick J. McCann Jr. and Andrew D. Mullendore of Chamberlain Hrdlicka White Williams & Aughtry.

Counsel information for the IRS was unavailable.

The case is Hanover Insurance Co. Ltd. v. Commissioner, docket number 15459-25, in the U.S. Tax Court.